Country Report Ecuador August 2008

Outlook for 2008-09

• MrCorrea will continue to enact policies to bolster his popularity in the run-up to the September 28th 2008 referendum to ratify the constitution, which we expect to be affirmed by a slim margin.
• MrCorreas anti-American rhetoric and close friendship with Venezuelas president, Hugo Chavez, will sustain tensions in the relationship with the US, Ecuadors main trading partner.
• State intervention in the economy is a key aspect of the new constitution and will increase during the outlook period, particularly in strategic areas, such as energy, banking and telecommunications.
• If, as we assume, oil prices remain high, the government will have the resources to increase social spending without jeopardising scheduled repayments, but a sharp decline in prices could prompt a debt default.
• At 1.8% in both 2008 and 2009 the pace of GDP growth will remain unspectacular compared with that of other net oil exporters in the region.
• We expect inflation to rise above 10% in 2008 on the back of stronger supply-side pressures and an increasingly expansionary fiscal policy.
• Driven by high international oil prices the current-account surplus will reach 7.2% of GDP in 2008. As oil prices stabilise, production stagnates and import growth remains strong, we expect the 2009 surplus to drop to 2% of GDP.

Monthly review

• In marathon late-night meetings, Ecuadors constitutional assembly approved hundreds of articles and met the extended eight-month deadline to finish the new constitution.
• The new draft adopts Venezuelan and indigenous ideas, but fails to address many of the elements that have contributed to the political instability of the past decade.
• Central Bank president, Robert Andrade, resigned after six months in office and just days before congressional approval of the constitution, which, if affirmed, will strip the Central Bank of its remaining independence.
• The Correa government announced measures to increase subsidies and freeze electricity prices in an attempt to combat price rises and bolster support.
• Huge oil revenue has enabled the government to ease reliance on external debt financing so far in 2008. By June debt disbursements had declined by 78% year on year.